Direct Labor Rate Standard:

The
standard rate per hour for direct labor includes not
only wages earned but also fringe benefits and other
labor costs.

In
many plants, the standard is based on rates
established in collective bargaining agreements that
define hourly wages, piece rates and bonus
differentials. Without a union contract, rates are
based on the earnings rate as determined by
agreement between the employ and the personnel
department at the time of hiring. Since rates are
generally based on definite agreements, labor rate
variances are not too frequent. If they occur, they
are generally due to unusual short-term conditions
existing in the factory.

To
assure fairness in rates paid for each operation
performed, job rating has become a recognized
procedure in industry. When a rate is revised or a
change is authorized temporarily, it must be
reported promptly to the payroll department to avoid
delays, incorrect pay, and faulty reporting. Any
difference between the standard and actual rates
results in a labor rate (wage or cost) variance.

Example:

Following is an example of the calculation of
standard labor rate per hour:

Basic wage rate per hour

$10

Employment taxes at 10% of the
basic rate

1

Fringe benefits at 30% of the
basic rate

3

Standard rate per direct labor
hour

14

Many companies
prepare a single standard rate for all employees in
a department. This standard rate reflect the
expected "mix" of workers, even though the actual
wage rates may very somewhat from individual to
individual due to differing skills or seniority. A
single standard rate simplifies the use of standard
costs and also permits the manager to monitor the
use of employees within department. according to
standard computed in above example, the direct labor
rate is $14 per hour.